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Week In Review

Employment

April nonfarm payrolls grew by 164,000 jobs, falling short of market expectations for an increase of 193,000. Average hourly earnings rose 0.1% for the month and have risen 2.6% over the past year. The unemployment rate fell to 3.9%, as the labor force participation rate fell to 62.8%.

Our Take

Payroll growth disappointed in April, yet the unemployment rate fell to an 18 year low. One possible explanation for the divergence between the two reports is that a tight labor market means fewer workers available to create new jobs. However, a tight jobs market should lead to increasing wages, yet earnings growth also disappointed. The Fed is likely to believe that higher wages in the future are likely, if for no other reason than to justify their current tightening plans.

Trade

The meetings on trade negotiations between the U.S. and China ended with no major breakthroughs. While some small issues were resolved, there was no progress on intellectual property abuses, Chinese government subsidies for certain industries, reduction of the bilateral U.S.-China trade deficit, or restrictions on investment in each country by firms from the other. The Chinese state media reported that the two sides will continue talking, and the Trump administration delayed implementation of tariffs.

Our Take

A significant agreement on the major issues was always unlikely to be the result of two days of talks. It is encouraging that the two sides are continuing to talk and that no major new tariffs or trade restrictions are being implemented yet. The two sides’ current positions are very far apart, but the rhetoric and threats coming from each seem to have cooled off a bit recently. Hopefully this trend continues, and the U.S. and China are able to avoid imposing new trade restrictions that would be damaging to both sides and the larger global economy.

Income and Consumption

Personal income rose 0.3% in March, while consumption increased by 0.4%.

Our Take

Tepid consumer spending was a big reason that first quarter GDP was less robust than originally anticipated. March’s increase easily exceeded January (-0.1%) and February (-0.2%). This hints at potentially better second quarter GDP results if the consumer continues to spend.

Manufacturing

The ISM manufacturing index fell in April to 57.3 from 59.3.

Our Take

This is the second month of declines in the manufacturing index, having peaked in February at 60.8. The April reading is still firmly in expansionary territory, but manufacturers are likely pulling back a bit in response to weak consumer spending.

FOMC

On Wednesday, the Federal Reserve Open Market Committee (FOMC) announced its decision to maintain the federal funds rate at the current target of 1.5% to 1.75%. According to the Fed statement, the labor market continued to strengthen and economic activity has been “rising at a moderate rate.” The committee noted that growth of household spending moderated from strong fourth quarter readings. The committee also acknowledged that inflation has moved closer to its 2% target.

Our Take

Unemployment is low, growth is accelerating, and inflation is nearing its 2% target, yet nothing in the statement hinted that Fed officials plan to deviate from the stated gradual path of rate increases.

Municipals

Moody’s Investors Service downgraded St. Louis, Missouri’s credit rating this week. The ratings agency lowered St. Louis’s general obligation rating from A3 to Baa1. Moody’s cited the city’s “weakened reserve position” as one of the reasons for the downgrade. It was reported that St. Louis’s reserve levels are estimated at $16.5 million, lower than the target of almost $26 million.

Our Take

Prior to this week’s downgrade, St. Louis had its credit rating cut by Moody’s in 2015, 2016, and most recently in March of 2017. Looking ahead, lawmakers have the opportunity to increase reserves when crafting the 2019 budget. St. Louis should focus on improving its fiscal strength, especially before voters decide in August whether the city should issue $50 million of new debt.